By Jesus Cañas, Roberto Coronado and Keith Phillips Southwest Economy, Federal Reserve Bank of Dallas

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Influences on Retailing

Coronado showed that the peso's value creates swings in U.S.-Mexico cross-border retailing. Jeff Campbell, a senior economist with the Federal Reserve Bank of Chicago, indicated the same is true on the U.S.-Canada frontier. According to Campbell, demand shocks from changes in the real exchange rate are more likely to impact the number of businesses than the number of employees per business. [4] His results highlight the turbulence created on international borders by large exchange-rate movements. For a given loss of employment, the effects on real estate, banking and other sectors are likely to be larger for shocks that put retailers out of business than for those that simply reduce retail employment.

John Hadjimarcou, a marketing and management professor at the University of Texas at El Paso, went a step further, studying not only the consequences of currency devaluations but also the impact of cross-border competition in the retail sector. [5] Out of a sample of 200 El Paso retailers, 176 completed a survey, with 54.5 percent indicating that at least half their sales were to Mexican nationals.

Hadjimarcou found that retailers concerned about exchange-rate fluctuations tailor their product mix to attract Mexican customers. He was surprised to learn, however, that El Paso retailers don't pay much attention to competitors on the Mexican side of the border. In a follow-up survey, he discovered this is because they believe the Mexican stores cannot offer the same quality, range of merchandise, atmosphere and prices.

Richard Adkisson, economics professor at New Mexico State University, focused on the U.S.-Mexico border in studying retail trade after implementation of the North American Free Trade Agreement in 1994. [6] Because NAFTA lowered trade barriers between the two countries, more U.S. products and retailers are available in Mexico, reducing the demand for retail goods on the American side of the border. Adkisson found a drop in retail sales of some items on the U.S. side under NAFTA, particularly groceries and furniture. Because a sharp peso devaluation occurred as NAFTA went into effect, however, it is difficult to determine whether the sales decline was due to NAFTA or the devaluation.

Retailing in the Age of Terrorism

The terrorist attacks of Sept. 11, 2001, changed life along the U.S.-Mexico border. Tougher security measures have resulted in long waits at entry points and fewer crossers. The number of people traveling from Mexico into the U.S. declined from 290 million in 2000 to 253 million in 2002. The most recent data available show that number dropped to 242 million in 2004. While the number of people crossing has fallen 16.5 percent since 2000, retail trade along the border has actually increased since 9/11.

Tom Fullerton, economics professor at the University of Texas at El Paso and director of the Border Region Modeling Project, has developed an econometric model to measure the impact of 9/11 on El Paso's economy. [7] The results indicate that tighter border control has reduced some categories of cross-border bridge traffic, especially passenger vehicles. Retail sales grew over the same period, however, suggesting that fewer trips by Mexican nationals to El Paso may be offset by increased sales per shopper.

J. Michael Patrick, director of the Texas Center for Border Economic and Enterprise Development at Texas A&M International University, argued that 9/11 had a short-lived, negative impact on cross-border shopping. U.S. border retail sales grew 3.7 percent in 2001, he said, even though northbound traffic by foot fell 17.9 percent and by vehicle 24.4 percent between September and November 2001.

Patrick pointed to other factors with the potential for long-term impact, such as the US-VISIT program, which checks the digital fingerscans and photos of those seeking visas against a database of known criminals and suspected terrorists. When the visitor arrives at the port of entry, the fingerscans are used to verify that person is the same one who received the visa. Entry procedures have been fully implemented since the end of last year, with few major problems. Exit procedures, however, are still being tested. Although the government touts the program as a way to enhance security and facilitate legitimate travel and trade, many worry it will adversely affect the border economy.

Patrick expects retailing along the U.S. border to continue growing, driven mostly by healthy population increases in the region. This growth could be significantly hampered, however, if US-VISIT exit procedures are inefficient. Patrick estimates that a 10 percent decline in northbound crossings due to US-VISIT would reduce retail sales in Texas border cities by $760 million, or 2.2 percent.

The Future of Cross-Border Retailing

Deborah Fowler of Texas Tech University, Frances Ortiz Schultschik of the San Antonio Convention and Visitors Bureau, Greg Souquette of H-E-B Grocery Co., Ted Omohundro of Prime Retail and Michael Niemira of the International Council of Shopping Centers sat on a panel to discuss trends in cross-border retailing.

They agreed that Mexico's retail industry is undergoing a major transformation. The number of high-end stores in large Mexican cities is growing, giving their U.S. counterparts more competition. U.S. retailers still have the edge because they carry a greater variety of items, have the latest styles and often sell at significantly lower prices. These advantages may erode as Mexico's retail industry evolves.

To remain competitive with Mexican stores and other U.S. markets, panelists agreed, border cities and retailers seeking cross-border shoppers must focus on customer service. San Antonio and Houston are among the many U.S. cities with tourism bureaus or chambers of commerce that offer travel packages from Mexico that include airfare, hotel, shopping trips, and such extras as tourist activities and health care. Such package deals, combined with personal customer service, will be a necessary component of marketing to the Mexican shopper in the future.

Crossing borders usually involves inconveniences, but shoppers make the trip when retailers in another country offer better prices, selection or service. For the U.S.-Mexico border region, these differences have led to billions of dollars in business. As the gaps between the two economies shrink-and, in particular, as retailing in Mexico becomes more sophisticated-the character of cross-border shopping may change, presenting challenges to businesses on both sides.

About the Authors Cañas and Coronado are assistant economists at the El Paso Branch and Phillips is a senior economist and policy advisor at the San Antonio Branch of the Federal Reserve Bank of Dallas. Notes 1. "Texas Border Benefits from Retail Sales to Mexican Nationals," by Keith R. Phillips and Roberto Coronado, in The Face of Texas, Federal Reserve Bank of Dallas, October 2005. 2. "The Economic Impact of Mexican Visitors to the Lower Rio Grande Valley 2003," by Suad Ghaddar, Chad Richardson and Cynthia J. Brown, Center for Border Economic Studies, University of Texas-Pan American, Technical Report, May 2004. 3. "The Economic Impacts of Mexican Visitors to Arizona: 2001," by Alberta H. Charney and Vera K. Pavlakovich-Kochi, University of Arizona, Research Study, July 2002. About Southwest Economy Southwest Economy is published six times annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research Department of the Federal Reserve Bank of Dallas..